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Cut and trust

Last week, I looked at some of the most important powers of trustees, including the power to select beneficiaries from the trust deed&#39s list of potential beneficiaries in preference to the initial beneficiaries named or described by the settlor.

I also noted the absence in almost all trust documents of the right of the settlor, or indeed of any other person, to remove a trustee who does not want to be removed unless that trustee has committed some sort of transgression such as leaving the country for more than one year (if that can be called a transgression), being made bankrupt or becoming insane (so Sheffield Wednesday supporters need not apply).

All these issues make it especially vital for the settlor to take great care in his or her selection of the initial trustees, especially when we also take into account potential problems if the trustees cannot agree on a particular course of action as, usually, decisions must be taken unanimously. This can be a particular problem if one or more of the trustees cannot be contacted or refuses to act or co-operate as required.

It is all too easy for individuals to accept their nomination as trustees in ignorance of the extent of their potential duties and responsibilities such as, perhaps, determining the investment strategy of a trust&#39s assets, deciding how much of the trust&#39s income to pay to beneficiaries and which individuals should benefit from those payments.

On being called upon to fulfil these duties, it is not unheard of for trustees simply to put their heads in the sand and bring the workings of the trust to a complete standstill.

Many years ago, Allied Dunbar produced a simple but effective guide for individuals considering accepting a nomination as a trustee. This was an excellent and professional booklet which was furthermore (as you would expect of Dunbar) also an excellent prospecting tool as it enabled the adviser to explain the benefits of trusts to the nominee and offer to help in this way. I know this booklet is no longer available but, if any reader knows of a similar guide, can they please let me know and I will make it a subject of a future article.

This week, I want to identify the perfect trustee from a range of possibilities, including the settlor, the settlor&#39s spouse, other close members of the family, close friends, business colleagues, solicitor, accountant, trust corporation, and the client&#39s IFA.

Let us start with the settlor. This is almost invariably an obvious and sensible idea as it allows the settlor some degree of ongoing control over the trust, its assets and the selection of beneficiaries. Nothing wrong here, except where (as I am reliably advised happens all too often) the list of trustees stops there. In other words, the settlor nominates himself or herself as the sole trustee.

Obviously, when the settlor dies (or becomes otherwise disqualified from acting as trustee, as alluded to earlier in this article) there are no remaining trustees. In such circumstances, the duties and powers of the trustees pass to the administrators of the deceased&#39s estate – a fine answer straight from the text book.

In practice, however, the administrators may not be willing to also act as trustees, so it will be left to the courts to determine how the trust should be dealt with – usually themselves appointing a trustee who might have little or no knowledge or real interest in determining the real wishes of the deceased settlor.

It should go without saying, therefore, that in most cases the settlor should ensure there is at least one additional trustee. However, too many more trustees could make the trust unworkable where a unanimous decision of the trustees is required for any proposed action within the trust. So, who else should be appointed?

According to the insurance companies I have surveyed, in the vast majority of cases, the second trustee (and usually the last one, as rarely do settlors appoint more than two trustees) is the settlor&#39s spouse. The merits of such a selection include the presumed fact that this is someone close to the settlor who knows what he or she would want to achieve with the trust, who agrees and empathises with his or her thoughts about the preferred beneficiary or beneficiaries (usually their child or children) and who will concur with all his or her ongoing wishes with regard to the workings of the trust, ensuring unanimity.

All this is fine and dandy while there is matrimonial bliss but what might happen if the couple grow to hate each other, especially if this leads to divorce? In these circumstances, the settlor&#39s spouse might enthusiastically block all trust activity (investment, payment to beneficiaries and so on) to spite the settlor or – especially during divorce settlement negotiations – to prise some other benefit out of the settlor. In divorce cases, this could include enhanced maintenance payments or a greater share of the couple&#39s assets.

It is my experience that few divorce lawyers properly seek to determine whether their client is a trustee of any trusts, including those relating to investment and life insurance policies. If they were to do so, they would find a superb negotiating asset.

Moreover, if the spouse is the only other trustee, then on the settlor&#39s death the spouse becomes the only trustee. Obvious, of course, but remember that this will almost invariably mean that the spouse then has full discretion as to the identity of the trust&#39s beneficiaries and may well select – especially if the list of potential beneficiaries is very wide, as is usually the case – very different beneficiaries from those who might clearly have been preferred by the deceased settlor.

So, the spouse might not be the obvious next selection as a trustee or even one of a number of additional trustees, remembering the unanimity rule. Who else could be appointed, then?

Well, the excellent training guide on this topic produced for Allied Dunbar representatives a couple of decades ago suggests the settlor should be encouraged to think of people who they trust, are bright enough to be able to understand the duties and powers to be vested in them, are not scared or humbled by the prospect of dealing with other professional people (accountants, solicitors and investment advisers) and are sufficiently financially prosperous themselves not to be overwhelmed by potentially large amounts of capital under their control within the trust, nor tempted to misappropriate those assets (a risk I will look at next week in expanding this discussion about the selection of trustees).

I do not mean this to be an advert for Allied Dunbar but most people in the insurance industry know that its core training in this area was at the time decades in front of almost anyone else – in fact, well in front of almost every IFA and direct salesforce today.

This strategy prompts the client/settlor to list close family and business colleagues who, ideally, will be at least as wealthy as themselves (and perhaps considerably more so). From this list, the client should be encouraged to select a manageable number of trustees (say, two or three) who should then be contacted, first by the client and then by the adviser – the latter to advise of the duties and powers of trustees – to finalise the nomination.

The adviser in this highly professional sequence of events is, of course, necessarily exposed to talking to at least two or three high-quality individuals who surely must, therefore, represent prospective clients. But are these people more suitable as trus-tees than the settlor&#39s spouse? We will continue this disc- ussion next week.


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